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Bankruptcy Court Rules on Chapter 13 Debtors’ Motion to Value Homestead Property

A married couple in a Chapter 13 bankruptcy proceeding filed a motion to value the lien on their homestead property, a condominium in Florida. This type of motion can be useful to debtors who believe that the value of their property is less than the total amount of claims secured by liens. A court can rule that the amount of secured claims in excess of the property’s value is unsecured in a process often known as “lien stripping.” The Florida couple’s case involved liens held by several homeowners’ associations (HOAs) for unpaid assessments. In re Sain, No. 13-13325, order (Bankr. S.D. Fla., Oct. 29, 2013). The court held that it could not strip off the assessments because of a particular feature of Florida law. It sustained the HOAs’ limited objection to the debtors’ motion.

A creditor’s secured claim on property owned by the bankruptcy estate is only secured up to the value of the secured property. The remainder of the claim is unsecured. 11 U.S.C. § 506. For example, if a creditor has a claim to real property, secured by a lien, in the amount of $200,000, but the value of the real property is $180,000, then $20,000 of the creditor’s claim is unsecured. A debtor may move the court to make a finding regarding the value of a creditor’s secured claim in order to determine the unsecured amount.

At the time the debtors filed their bankruptcy petition, their condominium was encumbered by first and second mortgages, as well as recorded liens from three HOAs involving unpaid assessments governed by Florida law. The debtors did not dispute the validity or amount of the HOAs’ liens, but claimed that the condominium had no equity in excess of the amount due to the holders of the two mortgages. They filed a “motion to value and determine secured status of lien on real property” asking the court to strip off the HOA liens.

The HOAs did not dispute the question of valuation, arguing instead that Florida law prevented lien stripping under the circumstances of the case. A Florida statute makes a purchaser of real estate jointly and severally liable for assessments still owed by the previous owner at the time of sale. FL Stat. § 720.3085(2)(b). This means that even if the HOAs were unable to enforce the liens against the debtors, the next owner would be liable as well. California does not have a specifically-equivalent statute regarding post-sale enforcement of unpaid assessments. The HOAs filed a limited objection to the motion to value making this argument.

The court sustained the HOAs’ limited objection in part. It held that the parties had not produced enough evidence or arguments to allow it to determine the priority of the three HOA liens. It also held that both the Florida statute and the Bankruptcy Code prevented it from stripping the lien, because to do so would potentially affect the liability of another person for the assessments. See 11 U.S.C. § 524(e).

Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area since 1997, guiding them through Chapter 7 or Chapter 13 bankruptcies and helping them repair their finances with dignity and respect. To schedule a free and confidential consultation to see how we may can help you, please contact us today online or at (310) 475-9399.

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